Economists and the Crisis

The Sunday Times examines the role of economists in Ireland during this crisis period: you can read it here.

25 replies on “Economists and the Crisis”

A nice piece, just one or two howlers. Does George Lee really believe one should ignore economists? Perhaps he was quoted out of context.

Lee was just saying that one should take Economists with a pinch of salt like, bankers, and Market specialists,etc Those people who until oh so recently were almost seen as infallable.Most of the article is an insubstantial fan letter to the cult of economists.THE WRITER SAYS WITHOUT HESITATION THAT MOST ECONOMISTS SAW THE CRISIS COMING,?In direct contradiction of studies as cited by Paul Gillespie and others who put into question the probability models and assumptions of economists and others before the onset of recession.

The golden rule of forecasting is to name a date or an event, but not both.

If you trace through the economic commentaries of the last 10 years, then there was virtual anonymity that the good times would not last forever, and many singled out the issues of the tax base, the public sector, the property bubble, and the growing gap between wages and labour productivity. Indeed, in 2007 and 2008 the discussion was between a hard and a soft landing, and whether it would strike in 2009 or 2010.

Few, of course, predicted that these issues would come to light during a major international recession, although most would have argued that an international recession would be one of a number of mechanisms that could expose the existing weaknesses.

Oh well,since some economists write insubstantial fan letters to themselves perhaps we shouldn’t be too critical.

I think one part where Burns’s article is misleading is its characterisation of Alan Ahearne’s article in yesterday’s IT. He describes it as a “strongly worded riposte”, saying that Alan has gone from being part of the “academic community” but is now “embedded” in government and this has “added vigour to his pen.”

To my mind, this characterisation reflects a lack of understanding of how economists debate. Economists disagree on things all the time and the pages of all leading journals are full of professional economists arguing against each others points.

Alan’s piece was no more strongly worded than the 20-guys article and if Burns thinks a description of our analysis as being “incomplete” and “drawing the wrong conclusions” is tough stuff, then I reckon he’d be completely shocked at the goings-on at major economics conferences.

And it’s important to realise that this stuff isn’t in any way personal. If academic economists turned on everyone who disagreed with them, we’d all have very few friends in the profession. So, from my perspective, I have the highest respect for Alan as an economist and as a person. I just don’t agree with him on this issue. But it is important for people to understand that having a good debate about the key issues is vitally important if we are going to arrive at the right solutions to this and other key problems.

The puff piece in the Times notwithstanding this crisis raises serious questions about economists and economics:
-The past two years have not enhanced the reputation of economists. Mostly they failed to point out fundamental weaknesses of financial markets and did not foresee the crisis, and now they disagree on appropriate policies and on the likely future course of events. Although more economic research has been done in the past 25 years than ever before, the economists whose names are most frequently referenced today, such as Hyman Minsky and John Maynard Keynes, are from earlier generations.- John Kay

Despite the puff piece in the Times, this crisis raises important questions about economists and economics:
-The past two years have not enhanced the reputation of economists. Mostly they failed to point out fundamental weaknesses of financial markets and did not foresee the crisis, and now they disagree on appropriate policies and on the likely future course of events. Although more economic research has been done in the past 25 years than ever before, the economists whose names are most frequently referenced today, such as Hyman Minsky and John Maynard Keynes, are from earlier generations.-John Kay, Financial Times, April 21, 09

Economists are now in the same boat as Natural Scientists – the mainstream media mis-represent their work, over-simplify their conclusions, and cherry-pick the research to fit an agenda. Then, when things don’t work out the way that agenda implied they would, the same mainstream media shoots the messengers.

It is said of the Daily Mail that it is on a mission to divide all of the world’s foodstuffs into those that either cause or cure cancer.

Soon all of the world’s economic ideas will be divided into those that either cause or cure recessions.

Indeed. And in the popular reporting about physics, Newton, Einstein, and Bohr feature prominently. Why? Because when talking to a journalist, it is easier to hang an argument on a well-known person from times past.

The most cited economists are Shleifer, Barro, Stiglitz, Heckman and Lucas, by the way.

Irrespective of how “economics” has performed in predicting and suggesting solutions to the crisis, the crisis has shown how vitally important the questions that the subject tries to answer are.

It appears that there can be a tendency for some people, particulary those with little exposure to economics, to attempt to tar the whole subject with the same brush. For example, by saying that it suffers from a neo liberal political bias or that it is based on unrealistic assumptions about human behaviour that render it useless. In other words that there is some fundamental insight about the subject that most people involved in it can’t see but this particular outside casual observer has noticed. I would suggest that claims of that scope would require much more than mere assertion followed by a single example to be taken very seriously.

Also, we can’t avoid the fact that we need to make decisions about our economy. The question is then, should decion makers listen to economists when they make those decisions? This is where the credibility of the subject becomes an important issue. Given the lack of economists at the dept. of finance compared to other countries it appears the subject could do a better job of selling itself.

As Kevin said, some clangers. For example, the practice of hiring in expertise to give specific policy advice (such as Colm Harmon being hired by the UK Cabinet Office) is not unusual in Ireland. The problem is that the advice is not always taken regardless how well founded it might be, if it does not coincide with the political considerations (one wonders what the objective function really is!). I do not see the government jumping to nationalise our banks even though we have lots of authoritative advice to do so (which I agree with).

An important issue not covered in the article is the standing of policy advice among the economics profession itself. It might be fashionable right now in a crisis, but that has not always been the case.

One thing is for sure there are few if any top ranking economists who have spend their entire career giving policy advice and doing policy research.

Much of the policy advice/analysis given (e.g. in policy reports) is completely discounted by our profession – all that really counts (for a ranking) is journal articles. But let’s face it, policy makers are not going to read the policy conclusions at the back of and AER paper.

In any case I doubt very much that it really takes a top ranked economist, according to current rankings, to give good policy advice, what is important is that there are people who understand the latest findings and are able to interpret the policy implications.

The article portrays economists as saying to the Government: “We’re world-class, you should listen to us, we told you so.” I can’t imagine a more self-defeating stragegy. The “we told you so” is especially dangerous. If that claim depends on pointing, as John Hurley did, to caveats buried in otherwise glowing reports, the media will give you plenty of rope before hanging you.

On a separate issue, an elementary reason for the sharp division of opinion among economists is a reluctance by some to face the painful reality: NAMA must overpay for these assets, otherwise the banks will be left undercapitalised.

An optimist may chose to believe these assets will recover some value in the coming years but if NAMA gets a discount of 25% (apparently the maximum haircut which would leave the banks with capital) and the actual value is 50% below their book value (a plausible scenario from what we know), then the assets would need to gain 50% in value before NAMA breaks even which will be a very long time indeed (e.g. book value = 100, NAMA pays 75, current actual value = 50. NAMA only breaks even when the actual value increases by 50%)

Incidentally, I doubt if CJ Haughey actually used the term “Doheny & Nesbitt school of economics”; he certainly did not coin the phrase (but his contempt was real!)

I offered some other comments here yesterday on Ahearne’s article and in my blog.

What I meant was that it is really tempting to say “I told you so” but few of us have actually uttered those words, knowing that it is not very constructive.

And while there are in fact a number of world-class economists in Dublin, most of us are well aware that saying such things marks the difference between a conversation and a lecture.

well, one clanger is that I was ‘hired’. I was asked to bring the public good – my research – to the debate by the Cabinet Office. That is the point of academic work – we are paid to teach and research all to the highest standards and that product is a public good. Sometimes that standard is very very high in Ireland.

If that research can be translated into policy advice of even action it clearly should be – and if the UK experience is anything to go on, incorporating that advice should be costless (the taxpayer pays me already) and with good folks on the demand side should reduce the use of external advice (certainly the experience with the UK Department of Education).

Returning to Edgar Morgenroth’s comment – I largely agree and perhaps Ireland is particularly bad at this? US and UK public research funders require engagement as part of the scoring of the grant. And major names – ashenfelter, krueger etc have all done stints at the helm of major policy bodies with no career impact

@ Colm
I should have put the “hired” in inverted commas – I was not sure if you had been asked to do a piece of work or not (sorry). In any case I agree with you – there are many useful (public good) results that should be brought to the attention of policy makers. If they do not read the journals then briefings are a good way of transmitting the message.

But there are also many areas where specific pieces of policy research are needed. This is especially true if we are thinking about Ireland specific issues where the international literature is a poor guide. Often that piece of research is primarily of Irish interest and hence hard to publish internationally (certainly in top journals), and hence does little to improve the international ranking of the author.

I take your point that the likes of Ashenfelter and Krueger have played a significant role in policy bodies, but then it is possible to move between these bodies and academia more easily in the US and it is possible to place policy papers based on US data in better journals.

It is also great that we have some top ranked academics who have expertise in in some very important areas for current Irish policy who are pitching in their advice. But there are also many other areas where we do not have this expertise (at least as measured by top 5% ranking) nor is there much incentive for it to emerge – that is especially true for policy orientated research.

The expansion of money supply was such that banks were encouraged to lend 105% of the cost of a house, to persons who could not afford to pay it back. The very high standard of economists may have condemned this practice but they did so out of the media. Guys, you should not be so shy when the next bubble occurs, OK? Lots of folks would appreciate the heads up! Consult the client list of AngIB…. Just send me 1% of your fee?

And there is no economic theory on how to cope with corruption that tends to spread, albeit not as fast as fractional reserve lending.
Do we all agree that things are going to get much worse, for Ireland, this year? And there is naff all we can do about it and that the Govt is bereft of advice that it can take, as it is compromized too thoroughly?

Robert Skidelsky,who is eminent Professor at warwick has said in a recent article that the vast majority of Prfessional economists in THE WORLD! did not forecast the crisis and certainly not its enormity.Check what ROBERT says before cheerleading the crystal ball gang back in old Ireland!

The ST article makes me question if economics is a “science” in any meaningful sense. And why economists get awarded Nobel Prizes. Is it certainly disengenuous of Richard Tol to speak of Physics in the same context as economics.

The media could ask the same about economists in any country. There is a global recession. Does the Irish media understand what the word ‘global’ means?

The belief that Ireland is suffering unquely badly in this global recession is
unfounded. Its little more than a version of MOPE syndrome. Just as many
in Ireland (over-represented in the media) have a psychological need to
believe that Ireland has the Most Oppressed People Ever, similarily many
(again over-represented in the media) have a psychological need to believe that Ireland is experiencing the World’s Worst Ever Recession.

Should Ireland fail to achieve this during the current global recession, the feeling of disappointment among these people will be profound. So, some shocking news for them. In Singapore, GDP was down 11.5 pc in 2009 Q1 compared with 2008 Q1. Because of the penal rates of taxation they level, both Sweden and Finland can afford to publish monthly GDP figures. In January 2009, Finland’s GDP was 9.8 pc lower than in January 2008. In February 2009, Sweden’s GDP was 9.4 pc lower than in February 2008.
As for most eastern European countries, their likely falls in GDP in 2009 don’t bear thinking about. And as for Japan, while its GDP figures for 2009 Q1 aren’t out yet, its manufacturing output was down 40pc y-o-y in 2009 Q1. The figure for Ireland 1pc.

So, to go back to the question, did any of the economists in these other countries predict these outcomes?

The Efficient Market Hypothesis is the core of contemporary economics. It states that prices are always and everywhere correct. Whatever market prices are, these are the right ones. So there can be no bubble because assets are everywhere priced correctly. This widespread belief and its perpetuation by economists must be viewed as the main contributor to the world-wide Great Recession.

I largely agree with Edgar’s comments. Another problem with doing policy-relevant research in Ireland is that the data are often not available. I wish I had a euro for every time I looked at a paper and thought that it would be really interesting to apply the analysis to the Irish case, but then sighed when I thought about the data requirements. Getting our hands on detailed micro-data (even where gathered by the CSO, a publicly funded body) or administrative data is somewhere between a big challenge and impossible. Confidentiality appears to be an obsession here in a way that it is not elsewhere – data that are routinely accessed in other countries are completely off limits in Ireland. As Edgar says, it’s hard enough to get stuff on Ireland published as it is, but when it’s based on lousy data, you haven’t a chance, so reinforcing the disincentives to do it.

Aedin, Edgar – completely agree data is a major constraint. Again one major effort that we should get behind is that over the next three to give years we finally get the data infrastructure in place that can deliver or else of these economists I want to see hired will have nothing to work on!!!

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